New Policy Weighed for Pricing Gas

Federal energy regulators will face their most important pricing decision in years on Wednesday, when they consider a new policy governing what consumers pay for natural gas.

The goal of the proposal under consideration by the Federal Energy Regulatory Commission is to allow households and industries that use natural gas to get the full benefits of the declining price of gas on the open market. Complex gas pricing regulations administered by FERC under the Natural Gas Policy Act of 1978 now prevent that.

But FERC's plan, broached last May, has natural gas producers up in arms and has renewed an old regional feud in Congress between representatives of major gas-using communities in the North and Midwest that want lower gas prices, and the gas-producing states of the Sun Belt.

So hot is the reaction to FERC's pricing plan that the commission may delay a final vote Wednesday on its most controvsersial provision, industry and congressional sources said.

"The primary purpose of FERC's package is to change the basic way gas is bought and sold," said Greg Shuttlesworth, senior vice president of Petroleum Industry Research Associates, a New York-based energy consulting group.

Now, much of the nation's natural gas supplies are bought by pipeline companies from producers and resold to distribution companies such as Washington Gas Light Co. and large individual users such as manufacturing companies.

FERC says its goal is a more competitive system in which the distribution companies are the predominant buyers and the pipelines merely transport the gas from gas fields to the distribution companies.

More open bidding for natural gas should result in lower prices for gas users, FERC reasons. One study by the Department of Energy estimates that consumers could gain as much as $2.2 billion annually if FERC's proposal is adopted.

Behind FERC's move is the fact that the price of oil is falling but prices of much of the natural gas burned in the United States are not, because this gas is covered by long-term contracts at prices set according to FERC's regulation.

FERC's proposal would change these rules, which establish prices for natural gas at the wellhead generally based on when the gas well went into service. "Older" gas carries low prices; "newer" gas is more expensive, and there is a wide gap between the two.

Pipeline companies seeking new customers currently blend supplies of cheaper "old" gas moving through their systems with the more expensive "new" gas, pricing the entire shipment midway between the two. A typical "old" gas price of $1.40 per thousand cubic feet blended with gas at $3.50 would create an average price of $2.80, for example.

The proposed rule would entitle distribution companies and other customers that have been receiving cheaper "old" gas to buy it directly from producers, drastically reducing the blending of cheap and costly gas by pipelines.

Most distribution companies would be big winners. WGL said this summer that it supported FERC's effort in general, and that the commission is "on the right track" toward a more competitive market that will "reduce the cost of gas in the long run." WGL did ask FERC to changed several specifics of the proposed rule.

But the halt in blending prices would force producers to try to sell costly "new" gas at the full price of $3.50 or more -- a price that few customers would be willing to pay, producers say. In particular, the big industrial customers who have the capability of switching between gas and fuel oil would not buy at that price.

FERC's proposal "would have the impact on the gas industry that the breakup of American Telephone & Telegraph Corp. had on the telephone industry. It's that significant," said one lobbyist yesterday leaving a gas industry strategy session.

Ted Davis, manager of gas operations for Conoco Inc., said the FERC proposal would cut gas producers' revenue by between $5 billion and $7 billion a year, while the Natural Gas Supply Association pegged the loss at between $2.5 billion and $6 billion annually.

That revenue loss would cut Conoco's exploration effort dramatically, said Davis. One-third of the drilling projects it has planned for 1986 would be scrubbed if FERC's plan took effect, because the lower gas prices wouldn't justify the costs, he said.